What the GST report misses

The 13th Finance Commission (TFC) has issued a report of the task force, constituted by it on 15 December, on various issues relating to the design and implementation of the goods and services tax (GST). There are several differences in the recommendations in this report and those in the first discussion paper released by the empowered committee of state finance ministers in November. The differences relate to several critical areas such as the tax base, tax rates, threshold limits, taxation of inter-state supplies of goods and services, exemptions or compounding systems and taxation of tobacco, alcohol and petroleum products. In a short column, it will be appropriate to focus on some of the important differences.

First, the TFC task force envisages seamless implementation of GST by all states and the Centre, if necessary by postponing the implementation date to 1 October. Such a unified roll-out requires a Constitutional amendment to enable states to levy taxes on services and the Centre to levy taxes on sales of goods, an agreement among all states on the amounts to be levied, removal of the central sales tax (CST) and implementing machinery that will put in place the processes to enable this to work. On each of these, there is no agreement yet within the empowered committee.

It is unlikely that the empowered committee will be convinced that a GST rate of 12% (Centre: 5%; states: 7%), as TFC suggests, would be revenue neutral— several states such as Tamil Nadu are viewing the entire exercise with some scepticism. There is pressure for a higher number and a higher proportion of allocation to states. The issue of CST is not yet settled, as the roll down of the tax to zero is not proceeding as planned. There is also no agreement on the exemptions that would be available. Among the most contentious is alcohol, where state excise revenues define huge political patronages. In fact, on excise on wines, there is a dispute before the World Trade Organization (WTO) that several states are levying discriminatory state excise duties. But the task force report recommends GST rates to cover these through levy of excise duties on tobacco and spirits. In short, several of the premises of the TFC task force are, at best, wishes and do not take into account the realities of the discussions before the empowered committee.

Second is the issue related to taxes to be subsumed under GST. The task force has really gone over the top here. It would like all goods and service sectors to be integrated into the framework, including the real estate and the power sectors, though there is no clear indication how this should be done. Local bodies would be entitled to a formula-based devolution of 2% in lieu of entry tax, octroi, cesses, and so on. Quite apart from the sheer magnitude of legislation required to do away with the tax collection powers of local bodies, such a broad-brush approach would be detrimental to revenue collection in large cities such as Mumbai that depend heavily on these levies. And how would the 2% be allocated—by the Centre or by the states? As cities grow, so do civic needs—would their services be constrained because the tax revenues allocated to them do not grow as rapidly? A conceptually elegant solution does not necessarily lend itself to pragmatic implementation.

Third, there is a list of exemptions that has been prescribed: all public services of the government (Central, state and municipalities or panchayats), education and health services, the public distribution system, and so on. TFC also says that no exemptions should be provided to developers of or units in special economic zones. It lays down a series of procedures for claiming set-offs and abatements that would require a very elaborate information technology-enabled system to be in place across all states—there is no evidence that such processes are even under contemplation. There is also a proposal to empower the committee of state finance ministers through the Constitution to be a permanent dispute resolution and solution finding body—another United Nations or WTO with, perhaps, the same level of effectiveness.

It is a little surprising that given the empowered committee is already grappling with the complexities of GST, the government would have encouraged a parallel analysis by TFC. If it was intended as a red herring, to divert attention away from some of the more contentious views of the committee, perhaps it’s likely to do more harm than good—encourage contention rather than solve issues.

Most importantly, the task force report does not address any of the issues raised in the discussion paper of the empowered committee, nor attempt to suggest solutions—almost as though this was a parallel exercise. It is quite clear that this report has been prepared by people who have little knowledge of ground realities of tax collection and implementation at the state level—in fact, one sees the same disconnect with reality as in the draft direct tax code released in August.

The above are only examples—there are several more such problems in the recommendations of the task force. In short, it is an idealists’ exercise, with no basis in reality—a fact that the media has yet to recognize.

S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at policytrack@livemint.com